You are an equity analyst (external) for a large U.S. equity mutual fund. Your fund has a sizable position in Amazon, Inc. (AMZN). Historically, it’s been a gem. I mean, NOT owning AMZN in a fund is a kind of investment sacrilege. The 10 year performance, even inclusive of the financial crisis, looks pretty. It’s up 1224.43% in that time period. Below is a 10 year chart of AMZN (red/green bar chart) and the S&P 500 (in blue). Even considering that we’re in a low interest rate environment and the “market” (SP500) has done spectacularly well this past decade, AMZN has outperformed.
So, as we do in investment management, it’s time for a thorough review. Your boss wants you to run the numbers and report back as to what to do with the fund’s position. Ultimately, you want to give a buy/sell/hold recommendation. Your argument must be well reasoned and backed by fundamental analysis.
PART I Calculate the growth rate over the past few years. Feel free to use older 10K filings to get a longer view of trends. What do you believe to be a reasonable growth rate of revenues for the next three years? What are your numbers, and why do you believe these are reasonable projections? Be sure and use the information you learn from researching part IV to formulate your projections.
PART II Recast the income statement as % of revenues. Be sure to point out any trends (as in marketing expenses or fulfillment expenses increasing or decreasing as a percentage of revenues). Calculate average historical line items as % of revenues. Using your sales growth rate calculated above, create pro forma income statements for the next two years. If you choose NOT to use historical average numbers (in some line items) to project pro forma income statement items be sure to mark them and tell my why your number is better than using a historical average.